Erik Hayden is the Founder and Managing Partner of Urban Catalyst.
“Location, location, location.” That’s what every real estate expert has been telling property investors since the dawn of time are the three most important indicators of value and profitability. Why would it be any different when considering which opportunity zone fund to invest in, especially during a pandemic economy?
Since the federal Tax Cut and Jobs Act of 2017 created the opportunity zone (OZ) program to spur private investment in distressed communities, states designated over 8,700 OZ census tracts. Hundreds of qualified opportunity zone funds (QOZFs) have been launched as investment and development vehicles, my company’s included.
With so many OZ funds to choose from, how do investors pick the right place to put their capital gains so they potentially pay fewer taxes? Which funds are most likely to enrich struggling communities while also returning profits to investors during the next decade?
I’ve explained before why I believe developer-led funds with a community-first focus are crucial to success. But today, there’s another element to cover: why location matters now more than ever.
Before investing in an OZ fund, investors should learn about the region it serves — its past, present and potential for appreciation. Start by staying on top of news like Moody’s recent analysis of which cities are best poised to recover quickly in a post-pandemic economy based on demographic criteria like workforce education levels, health care, and consumer debt.
Also bear in mind that an OZ fund needs four other essential drivers to succeed:
1. Job Engine
Local job engines are the intrinsic power behind OZs. I’m talking about employers who are expanding in or relocating to an OZ. They bring more workers, fuel the need for more housing and draw more shoppers, diners and entertainment seekers to an area.
Here in downtown San Jose, for instance, we’re fueled by the Silicon Valley job engine that’s spreading southward from Palo Alto and Sunnyvale and into our community. Google has purchased over 80 acres of property totaling more than $400 million worth of acquisitions to create their largest campus. Adobe, which built its headquarters downtown in 1996, recently broke ground on a tower for 4,000 employees.
Another example is Phoenix, Arizona, home to several promising OZs. The job engine there includes Apple, State Farm and new downtown college campuses of Arizona State University and the University of Arizona.
2. Population Growth And Housing Needs
A successful OZ fund must focus on areas where people need or want to live. For example, residents here in the Bay Area face a severe housing shortage that’s especially acute in Silicon Valley, where the explosive rate of jobs creation since 2008 has left “a jobs-housing mismatch of nearly five to one,” according to Joint Venture Silicon Valley president and CEO Russell Hancock.
3. Transit Infrastructure
Robust transit infrastructure is a critical indicator of an area’s economic vitality. An OZ with access to efficient transportation is a more desirable place to work, live and play.
Sometimes an OZ fund, in recognizing transit’s critical role in revitalization, will invest directly in infrastructure improvements. For example, the Blueprint Local fund based in Maryland is investing in the massive redo of Baltimore’s historic Penn Station to create a transit-oriented hub with retail, restaurants and offices.
4. Developer-Friendly Local Government
During a recent industry webinar (login required), HUD Secretary Ben Carson and other top OZ decision-makers emphasized the importance of local buy-in. They described many successful partnerships highlighted in a new report by the White House Opportunity and Revitalization Council.
A few examples: In Charleston, South Carolina, the city council approved unlimited residential density and lower parking requirements for OZ affordable housing projects. Leaders in Lafayette, Louisiana, approved tax breaks for two OZ projects by freezing property taxes at prerenovation levels for at least five years. The mayor of Birmingham, Alabama, created the Birmingham Inclusive Growth Partnership to identify OZ projects and market them to national investors, like the developer who bought a historic building that stood vacant for 36 years. They’ll create 140 workforce housing units with the help of Alabama Historic Tax Credits and city infrastructure improvements.
In San Jose, meanwhile, the supportive planning department streamlined its pre-construction process a few years ago, which is huge when you’re trying to get building permits approved without delays.
The Bottom Line
The future success of an OZ fund hinges on its location. Individuals who are looking to invest right now should watch for new reports and predictions about which regions will recover faster from Covid-19 lockdown. Look for third-party validation, like “best of” and other recognitions from industry publications, like Motley Fool, Forbes and Opportunity Zone Magazine.
“Location, location, location” isn’t just a mantra. It should be every OZ investor’s rallying cry.
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